Wednesday, February 29, 2012

The Value of Working with a Named Fiduciary, A Discretionary Trustee

Two of the major trends within the retirement plan industry are the promotion of fiduciary services and liability immunization for the Plan Sponsor or other fiduciaries. You’ve likely heard us say that ERISA specifically permits the delegation of responsibilities and the allocation of fiduciary duties to third parties. Of course, the natural side effect of this delegation is a reduction in exposure to fiduciary risk. We discussed this very topic in a June 2009 email entitled, “Fiduciary Delegation – Myth or Reality.” (available here)

As the marketplace evolves and new ideas are born, they are molded into various product offerings, and all too often “oversold." A great example of this is the (now old fashioned) fiduciary warranty. We are now seeing these evolutionary processes at work with the advent of ERISA §3(38) Investment Managers as a service built into certain products. When faced with the choice, conventional wisdom suggests that is better to utilize these services in hopes of better plan management and lessened fiduciary risk. The issue we see is that services of this nature are marketed and sold identically as comprehensive shields from liability for the plan sponsor, which they simply are not.

Earlier this week, Forbes.com published an article (available here) featuring a hypothetical deposition between an attorney and a Business Owner/Board of Directors. The article helps illustrate the notion that businesses typically do not consider their retirement plans to be a primary function of their business. As a result, retirement plans are rarely given the requisite attention from business owners/board members needed to fulfill their fiduciary responsibilities. A common assumption is that those under the employ of the owner will operate the plan and maintain responsibility over its compliance. Unfortunately, this can be detrimental to the success of the plan and problematic for plan fiduciaries that are personally liable for the plan’s operation.

We observe that being a fiduciary, and meeting the Prudent Fiduciary Standard of Care, is very complicated, even for those with experience in the field. It would be a monumental undertaking for any business owner or board to develop a technical expertise with qualified plans, which is something they are expected to have simply by choosing to sponsor a plan.